Caterpillar announces restructuring and cost reduction plans

On September 24, Caterpillar Inc. announced significant restructuring and cost reduction actions that are expected to lower operating costs by about $1.5 billion annually once fully implemented. The cost reduction steps will begin in late 2015 and reflect recent, current and expected market conditions. For 2015, the company’s sales and revenues outlook has weakened, with 2015 sales and revenues now expected to be about $48 billion, or $1 billion lower than the previous outlook of about $49 billion. For 2016, sales and revenues are expected to be about 5 percent below 2015.

Key steps planned by the company include:

An expected, permanent reduction in Caterpillar’s salaried and management workforce, including agency, of 4,000 to 5,000 people between Sept. 24, 2015, and the end of 2016, with most occurring in 2015, and with a total possible workforce reduction of more than 10,000 people, including the contemplated consolidation and closures of manufacturing facilities occurring through 2018.

The company will offer a voluntary retirement enhancement program for qualifying employees, which will be completed by the end of 2015.

Slightly less than half of the $1.5 billion of cost reduction is expected to be from lower Selling, General and Administrative (SG&A) costs. The reduction in SG&A will largely be in place and effective in 2016 and occur across the company.

The remaining cost reductions are expected to come from lower period manufacturing costs, including savings from additional contemplated facility consolidations and closures, which could impact more than 20 facilities and slightly more than 10 percent of the company’s manufacturing square footage. A portion of these cost reductions is expected to be effective in 2016, with more savings anticipated in 2017 and 2018.

“We are facing a convergence of challenging marketplace conditions in key regions and industry sectors – namely in mining and energy,” said Doug Oberhelman, Caterpillar chairman and CEO. “While we’ve already made substantial adjustments as these market conditions have emerged, we are taking even more decisive actions now. We don’t make these decisions lightly, but I’m confident these additional steps will better position Caterpillar to deliver solid results when demand improves.”

This year is the company’s third consecutive down year for sales and revenues, and 2016 would mark the first time in Caterpillar’s 90-year history that sales and revenues have decreased four years in a row.

“Our strategy is to deliver superior total shareholder returns through the business cycle, and growth is a key element of that strategy,” added Oberhelman. “However, several of the key industries we serve – including mining, oil and gas, construction and rail – have a long history of substantial cyclicality. While they are the right businesses to be in for the long term, we have to manage through what can be considerable and sometimes prolonged downturns.”

The September 24 announcement is in addition to significant actions already taken. Since 2013, Caterpillar has closed or announced plans to close or consolidate more than 20 facilities, impacting 8 million square feet of manufacturing space. The company has also reduced its total workforce by more than 31,000 since mid-2012.

“We recognize today’s news and actions taken in recent years are difficult for our employees, their families and the communities where we’re located,” said Oberhelman. “We have a talented and dedicated workforce, and we know this will be hard for them.”

While Caterpillar has taken action in response to macro-economic challenges, it has remained focused on strategy execution – and that has driven positive operational results, including:

Market share has improved in products across much of the company.

The company has delivered on decremental profit pull through targets as Lean manufacturing has driven its 2015 gross margin rate higher, and it is right in line with its highest level in 20 years.

Product quality is as good as it has been in Caterpillar’s history.

Caterpillar’s safety levels are among the best for heavy manufacturers.

“Operational improvements have contributed to our strong balance sheet and cash flow,” said Oberhelman. “In fact, three of our four best years of Machinery, Energy & Transportation (ME&T) operating cash flow have occurred since 2011 – at the same time, sales and revenues have been under pressure. That’s driven substantial improvement in our quarterly dividend. Our dividend increased 15 percent in 2013, 17 percent in 2014, and 10 percent in 2015. That’s enabled $8.2 billion of share repurchases over the past three years.”

Pre-tax costs associated with these actions are expected to be about $2 billion for employee-related severance and other termination benefits, and other exit-related costs associated with the consolidation of manufacturing facilities.